Saturday, November 22, 2008

So the financial sector is in the dumps! Ops... so are the big three US automakers. And then there are the department stores because nobody is spending. Why should we? My 401k is now a 101k and all I did was work hard and contribute my money. No sir... no more expensive dining out!

So how do we fix this? Doesn't look like bailouts or government stimulus will help. And creating another Roosevelt-like WPA is just another debt incurring government stimulus. Wages paid by the government are ultimately funded with our taxes, or deficits.

So where did this financial turmoil start? From our own doing! Riding the real state roller coaster until it derailed. Yes, I too rubbed my hands in glee as I watched climbing home values in my neighborhood. Now we know that those values were driven by "exuberant irrationality" of all parties involved... buyers, realtors, lenders and their incompetent appraisers, just because it was fashionable and everybody else was doing it! Don't blame it all on the speculators. But do blame the builders, whose greed created an excessive inventory of properties.

Moreover, the financial geniuses on Wall St. packaged and repackaged volatile debt instruments with hedged and leveraged derivatives in an attempt to mitigate risk. What these geniuses fail to note was one fundamental flaw. So entwined were these derivative instruments in their mathematical models that they inadvertently encapsulated cannibalistic properties. So with the slightest change in their valuation, a self-feeding frenzy ensued, and what normally would have been dismissed as a market blip, amplified into devaluation levels of quantum proportions.

The ensuing tightening of the credit market has accelerated the inevitable. Business models that depend heavily on debt financing are now surfacing to their true unsustainable levels... that of not being able to mask their ongoing operating losses! In other words, bad business! If I can't make something that I can't sell for a profit, so why am I making the @#%&*! thing? Can you hear me GM? And making "green" cars at a loss is also BAD BUSINESS. Can you hear me Nancy and Harry?

So what to do? Me... I believe in draconian measures. Government needs to tighten its belt, stop all the foolish bailouts or stimulus that cost the tax payer money. It only extends the inevitable and prolongs the misery of dying businesses. Instead, implement incentives so that the private sector can create new jobs... and get the hell out of the way! Saving GM to save jobs is a kiss of death. Let GM fight its own battle and become competitive by restructuring its business model.

The mantra should be "business incentives to create jobs" and throw away the "tax and spend" ideology of the progressive movement.